Expert view: Tone down return expectations from Indian stock market, says Premchandani of UTI AMC

Expert view: Amit Premchandani, Senior Vice President and Fund Manager – Equity at UTI AMC, believes valuation remains in above-average zone for large caps while mid and small cap are expensive. He says investors must tone down return expectations. In an interview with Mint, Premchandani shares his views on stock market and sectors he is positive about.

Edited excerpts:

How do you see the market’s performance in 2024? What were the key triggers that moved the markets?

This year’s key trends have been a sharp improvement in the earning profile of capital market players, driven by broader participation leading to significant volume growth for exchanges, pick up in SIP flows for mutual funds and growth in demat account and trading volumes for brokers and registrars.

Another sector that has seen a relatively sharp improvement in profitability and addressable markets is the broader quick commerce or digital economy that plays as the adoption curve steepens.

Markets and may be even the management are surprised by the traction in quick commerce.

What is the road ahead? Do you see any challenges that can spoil sentiment?

Earnings growth has been the key driver of markets over the last three years. However, FY25 has seen deceleration after three years of strong earnings growth.

The slowdown in consumer spending is now visible across sectors, which has reflected lower earnings outcomes than expected.

Fiscal impulse has been negative for FY25 while last the two quarters have seen inflation trajectory inching up, driven by food inflation.

Some of this may be transitory and may see mean reversion in the second half of the financial year 2025 (H2FY25).Valuation remains in above-average zone for large caps while mid and small cap are expensive. Forward return expectations must be toned down.

What should be our strategy for long-term equity investments?

In the long-term, equity market returns are linked to underlying earnings growth, but in the short-term, the market could either trade at an expensive or relatively cheap valuation depending upon the underlying macroeconomic environment and emotions of greed and fear of investors.

Equity markets have the tendency to revert to mean valuation, and SIP is a relatively better approach for long-term wealth creation.

On top of that, investors may increase allocation to equity during market corrections. More than 30 years’ data analysis suggests that investment in equities at lower valuations have yielded better forward returns.

What sectors look poised for high growth to you?

The IT sector has transitioned from a significant discount to Intrinsic Value to a premium in 2022 and is now closer to fair value. 

At this delicate juncture, with downward earnings revision most likely behind us, valuations have rebounded to reflect a recovery. 

We remain positive as the sector has strong cash flow, high ROIC and multiples that are almost 40-50% lower than other defensive proxies in the market, though not cheap relative to history. 

Notably, the sector’s ability to convert OCF (operating cash flows) into FCF (free cash flow) for equity shareholders has clearly improved, and it is currently pricing in high single-digit growth. 

After the multiyear cleanup of the banks’ balance sheets, they have demonstrated agility to navigate the macros over the last four years without major accidents. 

The regulatory environment has turned proactive, ensuring diagnosis of the issue is done at an early stage and largely eliminating terminal risk. 

However, the markets have excessively focused on irritants like quarterly volatility in margins or funding pressure on account of the high systemic loan-to-deposit ratio (LDR). 

At the same time, the market has ignored the highest ROA profile in history, mid-teen loan growth in an environment of low single-digit volume growth across sectors, decent asset quality, and adequate capital. 

This sector stands out from an intrinsic value framework and provides an opportunity for those of us who follow the intrinsic value approach.

Don’t you think optimism about domestic themes is overdone? Should we not be cautious about growth losing steam?

Disruption risk has reared its head in seemingly stable businesses over the last few years. 

Consumer staples as a sector have commanded a high premium on account of stable growth, improving margins, and strong return on capital employed. 

However, we have seen many new brands gaining traction through the e-commerce route, disrupting the distribution moat of established players. 

Similarly, quick commerce has expanded from a niche segment of customers in key metros to almost all large urban areas in the country in a period of 12 -18 months, disrupting not only small kiranas but large retail players as well. 

These disruptions are just examples of the risk of high multiples in some sectors going ahead. However, overall, India remains a growth market, and investors are attracted to participate in the journey of per capita income of Indians moving from $3,000 to $10,000 and beyond in the future. 

As the income profile grows, the consumption basket changes, with discretionary consumption and healthcare expenditure forming a larger part of the basket.

Recent National Account Statistics also reflect this, as data suggest the share of essentials in personal final consumption expenditure has decreased while the share of health, communication, and education has increased over FY13 and FY23. This trend should continue.

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Disclaimer: The views and recommendations above are those of individual analysts, experts, and brokerage firms, not Mint. We advise investors to consult certified experts before making any investment decisions.